Moral guarantees

This page was last modified on 20-09-2013

Unlike tangible and personal guarantees, moral guarantees are simple promises made by the debtor to do or refrain from doing something.

As it is a simple promise, a moral guarantee is often requested in addition to tangible or personal guarantees by the bank. For the debtor, a moral guarantee is the least restrictive and least costly form of guarantee.

Who is concerned

All businesses in each phase of their development may be asked by their bank to provide this type of additional guarantee.

How to proceed

Mortgage mandate

A mortgage mandate is a notarial deed which allows the bank to ask for a mortgage registration when it deems it appropriate, generally without having to ask for any authorisation from the debtor.

The bank would much prefer the mortgage registration but, in view of the associated costs, the customer may prefer to guarantee the loan with a mortgage mandate.

Promise to mortgage

A promise to mortgage is a private deed. It is a moral guarantee offered by the debtor or the surety. It consists in promising to take out a mortgage in favour of the bank if one of the conditions of the loan is not complied with or if the ability to repay the loan is called into question by an unfavourable change in the balance sheet.

For the bank, a mortgage mandate is preferable to a promise to mortgage.

Commitment not to sell or mortgage (property commitment)

This is a private deed whereby the debtor undertakes not to sell or mortgage one or more properties to other creditors without having obtained the written agreement of the creditor. This moral commitment is aimed at keeping the whole of the debtor’s property assets intact. It is entirely based on the honesty of the debtor, as it is merely a promise.

Commitment not to withdraw (subordination of claim)

When a company is set up, the partners often only invest the strict minimum required in terms of share capital. However, this minimum is rarely enough for a business to operate.

Many businesses therefore ask their partners to contribute advances remunerated at a fixed rate which do not, however, constitute a capital increase.

In this case, the bank can ask the partners to undertake not to withdraw their advances for as long as the business has a commitment vis-à-vis the bank.
In principle, this type of commitment is strengthened by a reciprocal commitment by the business not to repay the lending partners before the bank debt is repaid in full.

This agreement takes the form of a private deed, signed by the debtor, the third party (the lending partners) and the bank. Through this agreement, the third party's claim (shareholder or bondholder) becomes subordinated to the receivable that the bank has over the same debtor.

Maintaining the shareholder structure (Ownership Clause)

With this clause, the bank ensures that the structure of its customer’s shareholding will not be altered without its prior agreement. The bank may require inclusion of this clause in particular when the loan is granted largely because of the reputation of the shareholders. The bank generally decides on a certain percentage of the capital which must remain in the hands of the current shareholders.

Letter of intent

This is a written document whereby the parent company undertakes to honour the debt of the borrowing company should it have trouble repaying said debt. This is a moral commitment whose value is determined by the integrity of the company managers who have issued the letter of intent.

Comfort letter

This is a written document whereby the parent company makes a value judgment on the financial viability of the borrowing company. The parent company confirms that it is aware of the commitments of its subsidiary and of its intention to honour them. This is a sort of recommendation with a purely moral value.

Irrevocable commitment of a third party

For very short-term credit transactions, for example, the time it takes to carry out a transaction, the bank may, by way of a guarantee, ask for a reputable third party (for example a notary or a lawyer) to commit irrevocably to pay it the funds that are due.